Squabbling Over VC Loophole Leaves SBIR Program in Limbo
09/01/2009
Squabbling Over VC Loophole Leaves SBIR Program in Limbo
By Karl Thiel
BioWorld Today Columnist
Forget health care reform. Forget even a regulatory pathway for follow-on biologics. Congress can’t even get it together to reauthorize a program that is widely popular, largely uncontroversial, and that most people would agree has been a rousing success.
I’m talking about the Small Business Innovation Research (SBIR) grant program and its companion, the Small Business Technology Transfer (STTR) program. These officially expired in September 2008, and they have been living hand-to-mouth ever since on a series of continuing resolutions. The third such resolution, extending the program through Sept. 30, was passed at the end of July just before the program dried up for good.
It’s not that there is no political will to reauthorize these programs, but rather that the details of how 11 government agencies spend 2.5 percent of their external research budgets (or maybe 3.5 percent if the Senate gets its way) have led to a remarkable level of political in-fighting, lobbying, counter-lobbying, and dissension.
Two reauthorization bills did pass the House and Senate, respectively, in July, but some stark differences remain. When it became clear that there was no hope of ironing out the differences before the August recess, Congress punted once more. But luckily, that means that if you haven’t taken a side, there’s still time to get involved before debate resumes, hopefully in early September.
A VC-based Division
The issue getting the most attention is the extent to which venture capital-backed companies are allowed to participate in the program. The House bill would give them largely unfettered access, while the Senate version would allow NIH to give only 18 percent of its SBIR funds to companies that are majority owned by VCs (and other agencies would be limited to just 8 percent). But there are some other differences that have gotten less attention.
The Biotechnology Industry Organization (BIO) loves the House version. Loves it. And it’s easy to see why. It makes the SBIR program more amenable to its members. Current Phase I SBIR grants for $100,000 don’t really go a long way in the biotechnology biz, whereas expanded Phase II grants that would rise to $2 million or more under the House bill could make a real difference to a small company. Most biotech companies don’t get far without venture backing, so limiting the participation of majority VCowned companies is tantamount to limiting the participation of biotech…or at least that’s what BIO argues.
Not surprisingly, the National Venture Capital Association (NVCA) is also gleeful about the House bill, since it would give them access to the SBIR cash pool for the first time since 2003, when the Small Business Administration, as a result of an administrative ruling, determined that majority VC-owned companies weren’t really small businesses.
In the opposite corner, we have representatives of small business like the Small Business Technology Council. They prefer the Senate bill, pretty much for all the same reasons. The SBIR program, particularly as it would be structured under the House bill, is a competition over slices of a finite pie, and larger grants mean fewer grants. More grants to VCbacked companies mean fewer grants to non-VC-backed companies. It’s a zero sum game that they fear losing.
It’s easy to detect the taint of BIO and NVCA lobbying in the House bill, and its opponents are quick to point out that the bill’s sponsor, Rep. Nydia Velázquez (D-NY), who chairs the House Small Business Committee, wouldn’t allow any dissenting debate on the expanded role of VCs while the legislation was being considered. But as Otto Von Bismarck once said, laws are like sausages – it’s better not to see them being made. It’s still possible that the resulting bill will improve the SBIR program.
The Regional Undertones
Possible, but unlikely. At best it will probably have some unfortunate regional consequences. More awards going to VC-owned companies mean more awards going to California, New York, and Massachusetts, and fewer to the South and Midwest, which is why small business associations in these areas are particularly incensed about the proposed changes. (And perhaps why Velázquez is particularly receptive to the expanded role of VCs in the program.)
Keep in mind that VC-backed companies can and do already get SBIR grants – it’s only majority VC owned companies that can’t participate (and the Senate bill would give some more wiggle room on this). The reasoning that barred such companies from the program in 2003 still holds – they’re not really small businesses. Congress can change the law, but in doing so they’ll also be going away from the original intent of the program.
Even so, just opening the program to more VC-backed companies probably wouldn’t be such a big deal in isolation. After all, that was how the program operated until 2003, and if the small business groups opposed to the House bill have data showing that the program has improved since the VC-backed scoundrels were thrown out, they’re not doing a good job publicizing it.
Combining this with other changes, however, really could make life tougher for inchoate businesses. In particular, the House bill allows agencies to skip over Phase I grants and go straight to Phase II, the awards for which would be increased to $2 million or more from $750,000 today. That suddenly makes the program a lot more like another source of venture capital. One inflated Phase II grant suddenly displaces 20 current Phase I grants.
There are very few capital sources equivalent to a Phase I SBIR grant, which is intended to fund early feasibility or proof-of-concept work. If the government gives up on these grants, or greatly reduces them in the interest if funding more advanced work, a lot of early-stage ideas may never get off the ground.
What’s particularly troubling is that it comes at a time when technology business incubators around the country are struggling and VCs are increasingly less interested in funding early-stage work themselves. VCs may love the idea of mitigating their portfolio risk with a little extra government money, but they may at the same time be contributing to the demise of one of the few real sources of capital for vetting new ideas at their earliest stages – ideas that they may thus never see come through their doors.
Karl Thiel, an analyst for the Motley Fool, can be reached at kthiel@qwest.net. His opinions do not necessarily reflect those of BioWorld Today.
